Amazon.com (AMZN) released
its
second-quarter
earnings
report
on
August
1.
Here’s
Morningstar’s
take
on
Amazon’s
earnings
and
the
outlook
for
its
stock.
•
The
company’s
third-quarter
outlook
aligned
with
our
revenue
estimate
and
was
better
than
our
operating
income
estimate.
Amazon
continues
to
take
strides
in
efficiency
improvements
throughout
the
network,
which
helps
lower
costs
and
improve
delivery
speeds
and
ultimately
drives
increased
purchases
by
Prime
members.
•
AWS
has
shifted
back
to
growth
mode
after
the
optimization
efforts
by
clients
have
ended,
and
artificial
intelligence
has
captured
the
customers’
attention.
We
think
these
trends
are
consistent
with
our
expectation
that
AWS
is
an
overall
key
long-term
driver
for
Amazon.
Management
noted
a
multibillion
book
of
business
from
generative
AI
already.
More
importantly,
customers
have
returned
to
migrating
new
workloads
to
the
cloud.
Management
comments
are
consistent
with
recent
remarks
from
Microsoft
regarding
its
Azure
business,
and
we
think
it
bodes
well
for
growth
through
2026.
The
fact
that
backlog
is
bigger
than
revenue
and
is
growing
faster
gives
us
confidence
over
the
next
several
years.
•
We
believe
Amazon
is
well-positioned
in
generative
AI
and
should
benefit
as
the
technology
adoption
gains
steam.
We
think
the
company’s
proprietary
chips,
Trainium
and
Inferentia,
and
Bedrock
and
other
AI-related
solutions
support
this
notion.
Management
believes
generative
AI
can
add
tens
of
billions
of
dollars
to
revenue
over
the
next
several
years.
On
AWS
overall,
we
think
the
migration
to
the
public
cloud
is
an
enormous
opportunity
and
remains
in
the
early
stages
of
evolution,
with
AWS
being
the
clear
leader.
Based
on
strong
AI
demand,
Amazon
plans
to
increase
capital
investments
in
data
center
capacity
in
the
second
half
of
the
year,
when
it
expects
capital
expenditures
to
exceed
$32.5
billion
from
the
first
six
months
of
the
year.
•
Overall
demand
trends
remain
unchanged
over
the
last
year
or
so,
with
e-commerce
showing
signs
of
consumer
stress.
On
the
retail
side,
Amazon
continues
to
target
the
overall
customer
experience
by
expanding
its
selection
and
improving
delivery
speed.
These
factors
continue
to
drive
order
frequency
and
ticket
sizes
for
Prime
members.
Management
reiterated
it
can
continue
to
improve
selection
and
delivery
speed
while
improving
margins,
which
we
think
has
been
fairly
evident
over
the
last
year.
The
company
confirmed
that
consumers
continue
to
trade
down,
seek
deals,
and
focus
more
on
everyday
items
while
eschewing
larger-ticket
discretionary
items.
This
is
unsurprising
and
still
represents
the
underpinnings
of
our
near-term
estimates.
•
After
a
pullback
that
began
in
early
July,
we
see
shares
as
increasingly
attractive.
Key
Morningstar
Metrics
for
Amazon
• Fair
Value
Estimate:
$195.00
• Morningstar
Rating: ★★★★
• Morningstar
Economic
Moat
Rating:
Wide
• Morningstar
Uncertainty
Rating:
High
Fair
Value
Estimate
for
Amazon
With
its
4-star
rating,
we
believe
Amazon’s
stock
is
undervalued
compared
with
our
long-term
fair
value
estimate
of
$195
per
share.
Our
fair
value
estimate
for
Amazon
is
$195
per
share,
which
implies
a
2024
enterprise
value/sales
multiple
of
3
times
and
a
2%
free
cash
flow
yield.
We
think
multiples
are
a
little
less
meaningful
for
Amazon,
given
the
ongoing
heavy
investment
and
rapid
scaling
that
depresses
financial
performance.
However,
we
expect
the
company
to
significantly
grow
its
free
cash
flow
as
it
matures.
We
assign
a
wide
moat
rating
to
Amazon
based
on
network
effects,
cost
advantages,
intangible
assets,
and
switching
costs.
Amazon
has
been
disrupting
the
traditional
retail
industry
for
more
than
two
decades,
while
also
emerging
as
the
leading
infrastructure-as-a-service
provider
via
Amazon
Web
Services.
This
disruption
has
been
embraced
by
consumers
and
has
driven
change
across
the
entire
industry,
as
traditional
retailers
have
invested
heavily
in
technology
in
order
to
keep
pace.
Covid-19
has
accelerated
change,
and
given
the
company’s
technological
prowess,
massive
scale,
and
relationship
with
consumers,
we
think
Amazon
has
widened
its
lead,
which
we
believe
will
result
in
economic
returns
well
in
excess
of
its
cost
of
capital
for
years
to
come.
Financial
Strength
We
believe
Amazon
is
financially
sound.
Revenue
is
growing
rapidly,
margins
are
expanding,
the
company
has
unrivaled
scale,
and
the
balance
sheet
is
in
great
shape.
In
our
view,
the
marketplace
will
remain
attractive
to
third-party
sellers,
as
Prime
continues
to
tightly
weave
consumers
to
Amazon.
We
also
see
AWS
and
advertising
driving
overall
corporate
growth
and
continued
margin
expansion.
Risk
and
Uncertainty
We
assign
Amazon
a
Morningstar
Uncertainty
Rating
of
Medium.
Amazon
must
protect
its
leading
online
retailing
position,
which
can
be
challenging
as
consumer
preferences
change,
especially
postcovid
(as
consumers
may
revert
to
prior
behaviors),
and
as
traditional
retailers
bolster
their
online
presence.
Maintaining
an
e-commerce
edge
has
pushed
the
company
to
make
investments
in
nontraditional
areas,
such
as
producing
content
for
Prime
Video
and
building
out
its
own
transportation
network.
Similarly,
the
company
must
also
maintain
an
attractive
value
proposition
for
its
third-party
sellers.
Some
of
these
investment
areas
have
raised
investor
questions
in
the
past,
and
we
expect
management
to
continue
to
invest
according
to
its
strategy,
despite
periodic
margin
pressure
from
increased
spending.
Amazon
Bulls
Say
•
Amazon
is
the
clear
leader
in
e-commerce
and
enjoys
unrivaled
scale
to
continue
to
invest
in
growth
opportunities
and
drive
the
very
best
customer experience.
•
High-margin
advertising
and
AWS
are
growing
faster
than
the
corporate
average,
which
should
continue
to
boost
profitability
over
the
next
several years.
•
Amazon
Prime
memberships
help
attract
and
retain
customers
who
spend
more
with
Amazon.
This
reinforces
a
powerful
network
effect
while
bringing
in
recurring
and
high-margin revenue.
Amazon
Bears
Say
•
Regulatory
concerns
are
rising
for
large
technology
firms,
including
Amazon.
Further,
the
firm
may
face
increasing
regulatory
and
compliance
issues
as
it
expands internationally.
•
New
investments
–
notably
in
fulfillment,
delivery,
and
AWS
–
should
damp
free
cash
flow
growth.
Also,
Amazon’s
penetration
into
some
countries
might
be
harder
than
in
the
United
States
because
of
inferior
logistical networks.
•
Amazon
may
not
be
as
successful
in
penetrating
new
retail
categories,
such
as
luxury
goods,
because
of
consumer
preferences
and
an
improved
e-commerce
experience
from
larger retailers.
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